My Canadian Business Is Expanding to the U.S. — What Changes for Tax?

For a Canadian company, U.S. revenue arrives in stages, and each stage has its own tax trigger. Exporting from Canada is the gentlest. A permanent establishment — a fixed place of business, a dependent agent concluding contracts, or lengthy service projects on U.S. soil — is the threshold that gives the IRS the right to tax your business profits.

Below federal tax sits a second, often larger surface: the states. State income tax nexus and sales tax nexus operate on their own rules, are not constrained by the treaty, and — since the Wayfair decision — can be created by sales volume alone, with no physical presence at all.

Under the treaty's permanent establishment article, a Canadian company's business profits are taxable by the U.S. only if attributable to a U.S. PE — but 'PE' includes more than an office: dependent agents habitually concluding contracts, construction sites beyond twelve months, and services rendered in the U.S. beyond day-count thresholds can all cross the line. Even with no PE, best practice is a protective Form 1120-F with a treaty-based disclosure (Form 8833), preserving deductions and starting limitation periods. Once a PE exists, structure becomes the question: a branch (with branch profits tax, treaty-capped) versus a U.S. subsidiary, with transfer pricing documentation governing every cross-border charge under both section 247 in Canada and section 482 in the U.S.

The state layer demands its own map. Economic nexus thresholds — commonly around $100,000 of sales into a state — create sales tax registration and collection duties product by product, state by state, and many states assert income or franchise tax without regard to the federal treaty. Add U.S. payroll (an EIN, federal and state withholding, unemployment insurance) once anyone works on U.S. soil, and the expansion checklist becomes as much about registration hygiene as about tax rates.